FinTech@CSAIL Lecture: Central Bank Digital Currency Design: The Interest Rate-vs-Convenience Frontier

MIT Sloan Professor Haoxiang Zhu will explore the implications of introducing a central bank digital currency (CBDC) through commercial banks that differ in size. He will discuss two design features of CBDCs: interest-bearing and payment convenience, which correspond to “store of value” and “medium of exchange” properties of currencies. A CBDC that pays interest to users enhances monetary policy passthrough, but it harms small banks by shifting deposits and lending activities to large banks. In contrast, a CBDC that delivers its own convenience value to users levels the playing field by shifting deposits and lending from large banks to small ones, and it can enhance or reduce the transmission of monetary policy. He will share an interest rate-vs-convenience frontier for CBDC design, and show how a central bank’s optimal choice of CBDC can be obtained by interacting the CBDC frontier with its own objective mix between monetary policy passthrough and market competition.

Haoxiang Zhu is Gordon Y Billard Professor of Management and Finance and Associate Professor of Finance at the MIT Sloan School of Management. He is also a Research Associate at the National Bureau of Economic Research, a Faculty Affiliate of the MIT Golub Center for Finance and Policy, and a Faculty Affiliate of the MIT Laboratory for Financial Engineering. He currently serves as a finance Department Editor of Management Science and an Associate Editor of Journal of Finance.